Although Massachusetts' individual mandate for health care coverage took effect July 1, the first-year penalties for people who remain uninsured are relatively light. Likewise, most small employers had already renewed coverage for 2008, so it will be some time until observers can determine more about the effects of reform on their behavior regarding health insurance coverage.

A report from the Center for Studying Health System Change (HSC) says the issue for Massachusetts may come down to how close to the goal of universal coverage is realistically attainable. The state has a lower percentage of uninsured people compared to most other states, which increases the feasibility of achieving near universal coverage. But, the HSC asks, at what point do the costs to the state in getting one additional individual insured outweigh the benefits? "At some point, and probably not too far in the future, this is a question that Massachusetts will likely be required to answer," the report declares.

The state's universal coverage reform legislation, which was signed into law in April 2006, required most uninsured adult residents (an estimated 300,000 people or 9% of the adult population) to have health insurance coverage by July 1, 2007. Nearly three quarters of the uninsured are believed to be employed. Approximately two-thirds of them work more than 35 hours a week and approximately two-thirds work for small firms.

The lowest income and most vulnerable adults are covered with free or subsidized coverage through Medicaid expansions or a new Commonwealth Care program. And most of the remaining uninsured—those with incomes above 300% of the federal poverty level—were required to purchase insurance on their own or through their employer. Some 44% of the uninsured earn more than 300% of poverty.

The law requires employers to set up cafeteria plans through which employees can purchase health insurance with pre-tax dollars, which can reduce employee premiums by an average of 41%. Employers with 11 or more FTE employees that do not meet this requirement may be subject to a "free rider" surcharge if their employees' or dependents' care is paid for by the state uncompensated care pool.

Also, employers that don't offer a "fair and reasonable" contribution for their employees' coverage will be assessed up to $295 per worker per year. Observers have said they don't expect this requirement to have much impact overall, the Center report says. They view the fee as a way to offset the cost-shifting that occurs when employers that provide health coverage to their workers also contribute to the uncompensated care pool. They don't expect the fee to induce employers that do not currently offer coverage to workers to begin doing so since insurance costs significantly more than the fee. Observers also believe the fee is not large enough to impose a substantial financial burden on employers.

HSC researcher Laurie Felland, the lead author on the Massachusetts report, says the greatest pressure on employers to offer health insurance to their employees should come largely through the individual mandate. Because state residents will face tax penalties for going without health insurance, Ms. Felland says observers predict that employers that don't offer coverage may become less attractive to workers. While the direct employer requirements are targets firms with 11 or more employees, the individual mandate applies to all residents so it is likely to affect employers more broadly. Thus, workers who until now have declined coverage offered by their employer may now choose to participate due to the individual mandate, which would raise the employers' costs.

Reform also is expected to affect some already insured people. Since individuals are required to have a minimum level of coverage, employers offering less than that might be pressured by workers to increase their coverage, Ms. Felland says. That would likely increase costs, unless offset by wage cuts.

There remains a question of whether the individual mandate actually will force people to obtain insurance. Some observers have expressed skepticism that the tax penalty in years after the first year will be large enough to change behavior. They note, as an example, that a 37-year-old living in Boston would be assessed some $1,000 in tax penalties, but that would be about half the annual premium of the lowest-cost health plan available.

Another key element in the reform plan was the merger of the small group and nongroup insurance markets to pool the health care risks of some 750,000 people in the small group market (one to 50 workers) and 50,000 people in the nongroup, individual market.

Many market observers said they expect the individual mandate to bring younger, healthier people who currently don't purchase coverage to the combined pool and lower the overall risk, as well as increasing the number of insurance product choices available. But Ms. Felland says other observers are skeptical that the individual mandate is strong enough to encourage healthy people to purchase insurance to balance the costs of insuring sick people.

"In rapid fashion," Ms. Felland says, "Massachusetts has made efforts to both ignite demand for health insurance and establish a marketplace for individuals and small employers to purchase coverage. Market observers applauded the reform's coverage of more than 135,000 of the lowest-income uninsured residents through the Medicaid expansion and the subsidized Commonwealth Care program. Yet there are many challenges ad unknowns ahead…including many that pose substantial threats to the goal of near universal coverage."

The most fundamental issue, she says, is affordability. While most market observers agree that the primary goal of the reform is to improve access to health insurance, they contend that its ultimate success depends on affordability in both the short and long term.

If affordable coverage is not available, Ms. Felland says, it is unlikely that small employers on the cusp of offering insurance to their workers will be motivated to do so. Instead, they are more likely to pay the $295 annual fee rather than incur the greater costs of offering insurance.

Affordability is a key concern

Affordability also is a concern of individuals and, despite the individual mandate to have health insurance, there are likely to be some people who will forego coverage and pay the tax penalty. They may decide, according to Ms. Felland, that basic needs such as housing and food must take precedence over obtaining health insurance.

"Efforts in other states to reduce the number of uninsured by creating purchasing pools, offering insurance subsidies to employers and employees, tax credits, or limited benefits have struggled for precisely this reason—individuals' perceptions that they cannot afford coverage or that what they are buying is not worth the cost," the report says.

The researchers say the challenge of affordability extends to a policy debate about what should be the balance between the financial obligations of individuals and the state. The less affordable coverage is for consumers, the more likely the state will have to commit additional monies to subsidize people to achieve near universal coverage.

Aside from the affordability issue, the report says, there are a number of other reasons individuals may opt not to comply with the mandate. For example, they may not understand the individual mandate and their specific responsibilities under it. Others may dislike what they perceive as government interference in requiring that they have health insurance coverage. In some ways, the situation is similar to that with automobile insurance—while it is required, still not all car owners buy it.

If people who have decided not to obtain health insurance receive care, there are a number of impacts on the system. While some employers will be assessed a surcharge for costs their uninsured employees incur for care paid for by the state's uncompensated care pool, this has significant implications for the reform since much of the reform is expected to be financed by reallocating funds from the uncompensated care pool. Ms. Felland says Massachusetts is working to update the uncompensated care pool rules in an effort to align incentives so that individuals with access to affordable insurance take up coverage instead of relying on the pool.

A question that remains to be answered is what happens to the reform when the state's economy weakens. Right how, the researchers say, it is being implemented at a time when the economy is strong and unemployment is low. Typically during economic slowdowns, unemployment rises and people lose their employer-sponsored health insurance. Then costs for public programs such as Medicaid increase as more people become eligible. Finally, state revenues decline, reducing the ability to support the programs.

Ms. Felland tells State Health Watch that affordability was the central issue raised in the center's interviews with Massachusetts leaders. "There's a lot of uncertainty over whether the employer mandate and individual responsibility are sufficient," she says.